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From Grexit to Growth, or Trapped in Recession?

From Grexit to Growth, or Trapped in Recession?. Nicos Christodoulakis Athens University of Economics & Business, and Hellenic Observatory LSE. Brussels, November 2013. The Adjustment … Fiscal deficits back at pre-crisis levels Greece from -16%  -4% in 2013

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From Grexit to Growth, or Trapped in Recession?

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  1. From Grexit to Growth, or Trapped in Recession? Nicos Christodoulakis Athens University of Economics & Business, and Hellenic Observatory LSE Brussels, November 2013

  2. The Adjustment … Fiscal deficits back at pre-crisis levels Greece from -16%  -4% in 2013 Ireland from -32%  -5% in 2013 External deficits all in surplus Source: Ameco Database, 2013

  3. The Result … All economies in serious contraction for six consecutive years Greek economy collapsed by -23% of GDP Source: Ameco Database, 2013

  4. Output gap from potential GDP much higher and proportional to the intensity of austerity programs The intensity of austerity the size of adjustment programs as % GDP, per country j=GR, IR, IT, PT, SP and GE Source:Financial Times http://www.ft.com/cms/s/0/feb598a8-f8e8-11e0-a5f7-00144feab49a.html#axzz2JSOwncys. Recessionary impact is defined as a simple time-trend projection in 2000-2007 For details: Christodoulakis (2013), Austerity and Recession in the Euro Area

  5. As austerity gets more intense, its impact becomes stronger This is in sharp contrast with the early optimism adopted by IMF and ECB, that a front-loaded adjustment would have only small and transient effects

  6. Optimism #1: The growth impact of fiscal consolidation was estimated to be mild and in any case disappear soon IMF WEO Report (2010, p. 94): • The deflationary impact would be limited and recession would bottom-out in late 2010 and gradually rebound afterwards. • A fiscal correction by 1% of GDP, reduces output by 0.50% and raises unemployment by only 0.30%. Optimism #2:The optimal-debt theories Debt to GDP above a range 80-90% is detrimental to growth AER: Reinhart and Rogoff (2010) IMF: Kumar and Woo (2010) OECD: Cecchettiet al (2011) ECB: Checherita and Rother (2010), Baum et al (2012). Thus, Governments should “… swiftly implement ambitious strategies for debt reduction

  7. GREECE: Fiscal Punishment and Failure Unemployment from 8.5% to 27% Debt from 125% in 2009 to 180% of GDP in 2013!

  8. The snow-ball effect on debt in Greece and the Euro area Greece Euro17 After 2008, Greece adds 5-15% of GDP on debt every year, solely due to the lack of Growth

  9. The case of Greece: Major shortcomings 1.Private sector salaries fiercely attacked 2.Public sector universally cut, hitting incentives 3.Too many taxes, most on the same households 4. Banks’ recapitalization by issuing new public debt 5.The Grexit scare: lack of strategy, referendum, etc 6.RECESSION: Debt burden increases in recession

  10. Domestic Devaluation and Competitiveness 2012 Non-Oil Exports improved in 2012 by only 3.90% vs. 2011 despite a wage cut by -23% in the private sector Source: Bank of Greece, Conjectural Indicators, Aug 2013

  11. 2012 2013 Income Tax Revenues not improving, despite rates surging In 2013, nearly 1.5% GDP below 2012 Source: Bank of Greece, Conjectural Indicators, Aug 2013

  12. VAT rates rise, VAT Revenues fall !

  13. PSI 2012 had only limited effect in cutting debt • Banks recapitalization annulled most of the “haircut” • Haircut in Social Funds, no effect on current debt of GG Capital Injection Banks Social Funds PSI+ PSI+ Recapitalization Central Government haircut haircut Bailout Installment Govt. Debt Debt fully restored GG Debt cut = 0

  14. PREREQUISITES for Exiting Recession in Greece 1.Recapitalize Banks via EFSF, not Greek Public Debt (Financial Times, editorial, 22/2/2013) 2.Change the Policy Mix: More reforms, less austerity  More Public Investment  Fewer taxes to raise demand & liquidity  Selective actions, no universal cuts 3.Create a Growth Front: More CSF, EIB initiative 4.For credibility, endorse fiscal rules in the Constitution

  15. The official scenario (European Economy, 2012) Impossible figures !!! All failed!!! An alternative scenario with more growth, less austerity • Primary surplus less by 2% of GDP. From 4.5% to 2.5% per year  Finance Public investment, cut taxes, etc 2. Growth higher by 1.80 to 3.40% per year (according to the higher fiscal multipliers) Result: Debt/GDP ratio falls more, because of the snow-ball effect

  16. Debt Forecast 2020: Push Less to Get More More investment, fewer taxes can spur growth, cut unemployment & achieve debt sustainability

  17. Some General Conclusions: • Before the crisis, fiscal multipliers were very low.  Fiscal policy homogenized via SGP, growth affected by other structural factors. 2. After the crisis, countries got differentiated  Fiscal cuts seriously affected incomes. 3. Intense and front-loaded austerity programs fuelled uncertainty and caused deep recession 4. Adjustment programs should relax immediately, thus causing milder effects on recession

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